Oil tumbles on supply explanation, dollar, demand

NEW YORK — Oil prices fell sharply Thursday after the Energy Department reported unexpected declines in crude oil and gasoline supplies last week, but said the drop in crude inventories was due to temporary delays in unloading oil tankers along the Gulf Coast. A stronger dollar and concerns about gas demand also weighed on prices.

Retail gas prices, meanwhile, rose to a new record above $3.95 a gallon.

Light, sweet crude for July delivery fell $4.23 to $126.80 a barrel on the New York Mercantile Exchange, their lowest level since early last week. Prices were more than $2 lower in morning trading before the EIA report was issued, but shot up by more than $2 a barrel immediately after the report's release before turning lower again.

The initial ambivalent reaction to the inventory report partly reflects a deeper battle between investors who believe prices have risen far beyond levels that can be justified by underlying supply and demand fundamentals, and those who believe speculative money will continue flowing into oil futures, sending prices higher regardless of the market's fundamentals.

"You're seeing some big funds in there throwing money around on both sides of the market," said Jim Ritterbusch, president of Ritterbusch and Associates in Galena, Ill.

In its weekly inventory report, the department's Energy Information Administration said crude oil inventories fell by 8.8 million barrels last week, while gasoline supplies fell by 3.2 million barrels. Analysts surveyed by energy research firm Platts had expected slight increases in supplies of both.

But the EIA also offered a rare explanatory note on the Gulf Coast tanker problems. That could mean there will be a big jump in crude inventories in next week's report, analysts said. Gulf ports have closed many times in recent months due to fog, said Phil Flynn, an analyst at Alaron Trading Corp. in Chicago.

"This is the worst year I can remember for fog," Flynn said.

Also putting some weight on prices were supplies of distillates, including heating oil and diesel fuel, which rose by 1.6 million barrels last week, double what analysts had expected. July heating oil futures plummeted 13 cents to $3.6943 a gallon on that news.

"Heating oil is dragging the complex lower," Ritterbusch said.